Q2 2022 Ingersoll Rand Inc Earnings Call
Strong balance sheet and operational mindset to deliver on our own 2022 commitments and beyond.
We also remain very agile in this environment and you'll see today, how we continue to accelerate organic investments where growth around innovation and demand generation.
We also remain committed to our capital allocation strategy that is very focused on inorganic growth through bolt on acquisitions and today, we're highlighting three new acquisitions that are very well aligned with our stated M&A strategy and will enhance the quality of our portfolio.
Starting on slide four staying true to our five strategic imperatives, where operate sustainably is at the center, we continue to align our portfolio to sustainable high growth end markets supported by global Megatrends.
There are four points I would like to briefly highlight on this page.
First is that we have a simple two pronged approach of growing sustainably and operating sustainably.
When we release, our 2021 sustainability reporting John highlighting our progress across all aspects of our sustainability journey and how we continue to remain on track to hit our 2030 targets.
Third our efforts have resulted in another upgrade from MSCI to double day from eight which puts us in the upper quartile of our peer group.
It is also worth noting that we now have moved from a double b rating to a double a rating in less than two and a half years.
And these recent upgrade was done before the release of our 2021, so it's going to be able to report. So we will be watching carefully and we would expect to see continued positive momentum in our ratings from the other sustainability rating agencies.
Last I want to remind everyone to say to date for our annual sustainability webcast on September 22nd while we will provide a comprehensive update on our current efforts around sustainability.
Moving to slide five we want to highlight today, an exciting innovation, which is a testament to our commitment to sustainability and organic growth through differentiated technology.
Later this year, we will officially launch this first of its kind water treatment system coal iron solutions.
This is a very complex solution in the box, whereas more compressor and liquid pump technology from Ingersoll Rand, our combined with our own patented cold plasma technology to produce nano bubble that contain a high concentration of oxygen.
These innovation allows for chemical III, this infection and enhanced oxygenation of water.
Can see some of the incredible benefits this technology producers on the slide, including including higher disinfection of efficacy and increased oxygen concentration, all while delivering and driving a lower total cost of ownership and footprint.
We're efficiently launching this product later this year for indoor farming as well as water disinfection applications.
And we will continue to expand our reach into other high growth sustainable end markets like medical food and pharma.
What excites me, even more is that speed.
In which the team has moved to develop and commercialize the iron solutions technology.
Through the utilization of the Ingersoll Rand execution excellence or IRS that.
<unk> moved from the acquisition of the technology and IP behind Iron solutions to the launch of the product in less than 15 months.
In addition, the development was self funded within the P&C segment, and we continue to increase our investments in R&D to drive future organic growth opportunities like this.
Turning to slide six we're also very pleased to highlight the most recent inorganic investments, which remain our top priority from a capital allocation perspective.
Our M&A funnel remains very healthy and as of the end of Q2 of 2022. The formal remains over five times larger than it was in Q2 of 2020.
Earlier this week, we announced the signing of three bolt on acquisitions, which are well aligned with our strategic and financial criteria.
In addition, these three companies have grown on an aggregate of more than 20% CAGR over the past three years.
Let me quickly walk through the signing deals.
Hope it which is a leading provider of onsite systems that generate high purity nitrogen gas.
This is a great example of a bolt on acquisition that expands our addressable market to very close adjacencies within the ATM business.
In this case, the nitrogen generation can be connected to a compressor and produce nitrogen onsite and.
And there are huge benefits for these including the elimination of large nitrogen storage tanks at a customer site, which typically also require frequent refilling via swaps.
In addition, the purity and quality of the gas can be much better control on site with a drastic reduction in cost.
Second thing is higher which is a manufacturer of dry technology that has served as a long term OEM partner of our Ics Asia Pacific business.
Bringing differentiated and patented technology to our China compressor business.
Both <unk> and <unk> are great examples of expanding our solutions and offerings in the broader compressor ecosystem to better serve our customer needs.
And finally hydro <unk>, an India based manufacturer of progressive cavity pumps and retrofits spare parts.
Hydro <unk> generates more than 80% of its revenue through the sale of aftermarket parts and serves as a complementary addition to the recent <unk> acquisition to further penetrate the growing market in India.
We continue to be very prudent in our sourcing and execution of M&A deals as illustrated by the single digit aggregate pre synergy adjusted EBITDA purchase multiples for these three deals.
In addition, we expect to have several more bolt on acquisitions to announce in the second half of the year as shown by the fact that we have eight additional deals under LOI.
As a result, we're confident on being able to reaffirm our stated target of 400 to 500 basis points of annualized growth coming from M&A.
I will now turn the presentation over to Vic to provide an update on our Q2 financial performance.
Thanks for tranches.
Moving to slide seven we continue to be encouraged by the performance of the company in Q2, which saw strong balance of commercial and operational execution fueled by IRS, demonstrating our ability to operate in a very agile manner in the current environment.
We remain on track to deliver on our $300 million commitment and cost synergies from the merger.
In addition, as we've indicated many times, we have a funnel that stands in excess of $350 million and we are ready to take incremental actions, if warranted by macroeconomic conditions and market activity.
Total company orders and revenue increased 10% and 13% year over year, respectively, driven by strong double digit organic orders growth in Ics and low single digit organic growth and PSC orders.
The company delivered second quarter, adjusted EBITDA of $335 million of.
A 15% year over year improvement in adjusted EBITDA margins of 23, 3% up 50 basis points year over year improvement and 60 basis point improvement sequentially from Q1.
Free cash flow for the quarter was $165 million, despite ongoing headwinds from inventory due to the global supply chain as well as the need to support backlog.
Total liquidity of $2 4 billion at quarter end was down approximately $700 million from prior quarter, driven primarily by the execution of our capital structure strategy, which we will discuss shortly.
Our net leverage is one one turns a slight improvement of <unk> one turns from prior quarter.
Turning to slide eight for the total company Q2 orders grew 15% and revenue increased 18% both on an FX adjusted basis.
Overall, we posted a strong book to Bill of 111 turns for the quarter.
We remain encouraged by the strength of our backlog, which is up over 40% from last year.
Total company adjusted EBITDA increased 15% from the prior year.
Ics segment margin increased 70 basis points, while the PSC segment margin declined 390 basis points driven by the impact of prior year acquisitions as well as the impact of investments for growth such as the ion solution innovation highlighted by the sunset and the impact of China Lockdowns in two PSC facilities.
When adjusted to exclude the impact of M&A completed in 2021, PSC margins declined by 190 basis points.
It is important to note that both segments did remain price cost positive in terms of dollars in the second quarter, which speaks of the nimble actions of our team despite ongoing inflationary headwinds.
Finally, corporate cost came in at $35 million for the quarter down year over year, primarily due to lower incentive compensation costs and general cost savings and prudency offsetting incremental investments we made in the area of demand generation and it.
Adjusted EPS for the quarter was up 17% to <unk> 54 per share the.
The tax rate for the quarter was 23% and we anticipate the full year being approximately the same.
Moving onto the next slide free cash flow for the quarter was $165 million, despite a $92 million increase in inventory to support backlog.
Capex during the quarter totaled $21 million.
And leverage for the quarter was $1, one turns which was an old one turn improvement versus the prior quarter.
Total company liquidity now stands at $2 4 billion based on approximately $1 3 billion of cash and $1 1 billion of availability on our revolving credit facility.
Liquidity decreased by $700 million in the quarter, which included deploying $621 million of debt repayment $153 million of share repurchases and $8 million to our dividend payment.
As essential you mentioned M&A remains our top priority for our capital allocation, our funnel remains robust and active and we would expect M&A to be our primary usage of cash here in the second half of the year.
On slide 10, we show in more detailed the strategic changes, we have made to our capital structure.
In an effort to create a flexible and efficient capital structure, we took a number of actions within the quarter.
First we paid down the entirety of our euro term loan of $621 million.
The debt Paydown is consistent with our financial policies to prudently manage our gross debt and our commitment towards achieving investment grade credit ratings.
We also executed a combination of interest rate swaps.
Cross currency swaps, and Richard and interest rate caps to better balance our fixed to floating interest rate ratio and our currency mix of our debt.
In addition, strong cash generation of the business along with a strong balance sheet enable us to execute on our growth strategy across all economic conditions.
I will now turn the call back to the center to discuss our segments.
Thanks Vic.
Turning to slide 11, our industrial technologies and service segment delivered strong organic revenue growth of 14%.
Approximately 8% price and 6% volume growth year over year.
Adjusted EBITDA rose, 13% year over year with an adjusted EBITDA margin of 25, 4% up 70 basis points from prior year with an incremental margin of 32%.
Organic orders grew.
11% with a strong book to Bill of 111.
It is also important to know that on a two year stack. The Ics segment organic orders grew more than 50%.
Which is a higher rate than the Q1 2022, two year stack of approximately 40%, meaning that thus far we continue to see accelerated demand for our products.
If we move to the individual product categories. Each of the below figures includes the negative impact of FX, which you can see was about 5% headwind across the total segment.
Starting with compressors, we saw orders up in the high single digits.
A further breakdown shows orders for oil free products grew in the high teens on oil lubricated products grew in the low single digits.
The Americas team delivered solid performance with orders in North America up approximately 10%, while Latin America was up low twenties.
In mainland Europe down low single digits, due primarily to FX headwinds.
And a further look into our leading indicators like demand generation needs shows stable growth in mainline in mainland Europe .
The slide nearly two months of Lockdowns in Shanghai, China Asia Pacific game deliver orders in the mid teens.
This was driven by low double digit growth in China, and mid Twenty's growth across the rest of Asia Pacific.
And vacuums and blowers orders were down low single digits on a global basis, driven mainly by FX. We spoke about before and also had tough comps given we saw meat 40 growth in orders during Q2 of 2021.
Moving next to the power tools and lifting the power tools and listen the team delivered strong performance with orders for the business up approximately 20%.
This marks the largest quarter for orders since Q1 of 2015.
Looking at the sustainable innovation in action.
None of those were highlighting our next generation oil free compressor.
With a patented aerodynamic impeller design.
<unk> contributed compressor is approximately 15% more efficient than the oil free rotary compressor it will typically replace.
This technology is a perfect example of how we're continuing to address our customers' sustainability needs and goals by driving productivity through improve efficiency and reduce energy costs decreasing their scope, one and scope two greenhouse gas emissions.
Moving to slide 12 revenue in the precision and science technology segment grew 6% organically.
Additionally, the PSC team deliver adjusted EBITDA of $78 million, which was up 9% year over year with incremental margins of 11%.
Adjusted EBITDA margin was $26 eight down 390 basis points year over year.
Illustrated on the table in the bottom left side of the page the decline in adjusted EBITDA margin is driven primarily by the impact of prior year acquisitions, which drove 200 basis points of the decline. In addition, the impact of investments for growth such as our hydrogen business and the iron solutions product line that drove 80 basis points of Dick's.
Klein and China, Lockdowns, where the other largest discrete driver as nearly 60 basis points given the impact to two China facilities in the PFS segment.
Organic orders grew up 2% year over year at Q2 comps were challenging due to the prior year covered related demand primarily in the Thomas medical business.
Adjusting for the Covid and the one time large non repeating orders normalized organic orders were up approximately 9%.
And on a two year stack organic orders were up 22%.
It is also important to note that in Q1 of 2022, the two year oriented stack was approximately 19% again, showing some sequential acceleration of demand into Q2.
Since the Investor day in November one of the key questions. We have been asked is how we expect to achieve the mid <unk> EBITDA margin profile for PSC.
On the bottom Verizon side of the page I want to illustrate why we continue to believe a mid <unk> margin is achievable and we remain committed to delivering that in the medium term.
As you can see a 25% of the portfolio is already above 35% EBITDA margins.
With another 40% of the portfolio that is around 30% margin.
That leaves us with a few target the businesses that are at or below 25% EBITDA margin with the vast majority related to new acquisitions and early stage innovations.
We believe we have significant opportunity for margin expansion across the entire portfolio.
And we have a proven track record of margin expansion in both newly acquire assets and within our core business.
And let me point out to three examples the first example, citrix.
Illustrates how we plan to improve businesses that are in the lead on 25% EBITDA margin bookings.
You'll recall, we acquired <unk> in September of 2021, which had mid teens EBITDA margin at the time of acquisition and has already improved to the low twenty's in less than two quarters.
The next two examples blends out to how we can continue to improve businesses that are that already has some very high EBITDA margin.
First or dimension.
Which was another recently acquired company in Q4 of 2021, which is 11, which in less than two quarters have gone from mid fifties EBITA margin to low sixties.
EBITDA margin.
And then there is our legacy Gardner Denver Medical segment, which we now call our Thomas business due to the core business, where we have shown an ability to grow its EBITDA margin from the high <unk> in 2018 to the low <unk> by 2021, and where it remains today.
Overall, we continue to see strong runway on margin expansion across entire PSC portfolio, and we will use <unk> to ensure proper prioritization of action and nimble execution.
Moving to slide 13, once again, we are raising our full year guidance.
We're raising our organic growth guidance for the total company to 11% to 13%, which is a 300 basis points increase from our prior guidance.
The rays comes entirely from our Ics segment.
Growth increase is offset by the negative impact of FX.
<unk> is expected to now contribute headwinds of approximately 5% versus the headwind of 2% in prior guidance.
And this leads to our full year 2022 revenue guidance at 11% to 13% total growth.
We're also raising the adjusted EBITDA guidance to a range of $1 $3 95 billion.
The 142 5 billion.
We continue to expect free cash flow conversion to adjusted net income to be greater than or equal to 100%.
We anticipate our adjusted tax rate to be in the low twenties and capex to be approximately 2% of revenue.
And although we don't provide quarterly guidance the best way to think about the back half revenue and EBITDA facing is that the distribution between Q3 and Q4 is similar to what we saw in prior year.
We expect pricing to improve slightly from the first half to the second half as we continue to work through backlog and we do expect the price cost spread to improve in the second half of the year.
As a reminder, the new acquisitions mentioned on slide six are not included in the guidance as the transactions have not closed.
Turning to slide 14, as we wrap up today's call I want to reiterate that Ingersoll Rand is in a very strong position.
We delivered strong results in the first half of 2022, including record second quarter performance that was better than our expectations.
2022 is poised to be a strong year, despite known challenges and dynamic market conditions.
We will continue to remain agile and leveraged IRR across every facet of our business to deliver on our commitments.
So our employees I want to again, thank you for your continued engagement and making thoughtful action oriented decisions like the owners that you are.
These engagement continues to drive the accomplishment of our mission to make life better for our customers the environment and shareholders.
And our balance sheet is very strong and with our disciplined and comprehensive capital allocation strategy. We remained resilient to have the capacity to deploy capital to investments with the highest return on capital as we continue our track record of market performance.
With that I'll turn I'll turn the call back to the operator and open for Q&A.
If you would like to ask a question. Please press star one on your telephone keypad now you'll.
You will be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And our first question comes from Michael Halloran.
Your line.
Hey, good morning, everyone.
Good morning, Mike.
So couple of questions here first question Linda Center, you talked about constructive or positive leading indicators that give you confidence in the demand through remainder of the year at least maybe you could just dig into that a little bit more quoting customer conversations and what really with some of those leading indicators are that are making you feel that.
Level of confidence.
Yes, Mike I think one of the most important I'll say, leading indicators for US is what we have spoken in the past about demand generation.
Qualify leads which as you know we have a very unique.
Marketing engine to be able to.
Grabbed a lot of good new customers.
And as we saw during the quarter, we continue to see pretty good stability on the marketing qualified leads.
The team is generating and as we kind of move into July we actually even saw acceleration in some in some areas in some end markets and regions. So that's kind of what gives us confidence in as we look into the order momentum into July also pretty strong continue to be fairly strong.
Thanks for that and then good color on the capital deployment side of things.
And what Youre seeing in the pipeline could you give a little more context too.
Size of the transactions and if theres any change to the types of things you're pursuing at this point.
Sure, Mike I'll say that.
We're excited about what we what we see in the pipeline I mean, very solid very solid funnel you saw that.
Three eight transactions.
But a highly strategic I mean, great growing company as good technologies addressing the expanding the addressable markets I mean, it kind of hits all the marks and even also with the financial criteria and as we look out to the other eight that we have in the LOI I would say, it's similar to what we have been doing over the past 12 to 18 months, which kind of bolt on tuck in in nature.
Great returns good growing company is elevating the portfolio of the company and and ones that that we can be highly highly strategic for us to continue accelerating the growth.
Thanks for that I appreciate it.
Yes, Thank you Mike.
And we have a question from Julian Mitchell Youre.
Your line is open.
Thanks, Good morning.
Maybe just wanted to try and understand the sort of the second half.
EBITDA outlook, a little bit more clearly so.
When we're thinking about the sort of waiting between third and fourth quarter.
So we think in the third quarter was may be a sort of.
Hi, <unk> sure.
<unk> EBIT.
Just trying to understand the margin ramp and then by segment.
Any color you could give us on how much the margin step up into the back half is split between Ics versus PST.
Yes, Julien. This is this is Vic I'll take the first part of your question I'll, Let <unk> answer the second I think in terms of beer out. Your first question in terms of I think you asked about the phasing of EBITDA in Q3, yes, you're actually right I'd say mid to high 20 percents in terms of the phasing.
And what we would probably say, it's very consistent actually what we've been saying all year is that the phasing throughout the year in terms of the quarters is actually very similar to what you saw last year in terms of the phasing in terms of the Q3 Q4 waiting off EBITDA, So thats, probably a good properties.
Yes.
In terms of the segments I mean, if you think about it kind of first half second half which is.
The wisdom, because we look at we like to look at it is that think about Ips.
Flow through in the first half was approximately in the thirties and as we get closer to the <unk> for the second half and that's going to be driven primarily through a better pricing realization that we already have action.
As well as.
So we can kind of continued movement in terms of their merger related.
Related productivity savings that so think about it is already actions at.
You can color that we have so to speak in the bag already action and then from a PSC I think when you look at the data again same thing first half to second half of our flow through in the first half we're kind of in the low twenties with.
With an EBITA margin and generating in the first half into high Twenty's kind of 28% range and as we go into the second half EBIT.
EBITDA margin should we expect to grow closer to the <unk>, which leads to that incremental flow through of the fifties and again when you think about the big pieces.
Fairly similar in terms of better price realization given the actions that we have taken for.
For the P&C segment, it's a lot around the M&A synergy realization for the deals that we closed in the second half of 2021 and and also for PSC is kind of some of these non repeat China logged on volume.
And absorption related issue, so again, it feels like a fairly.
<unk> and the team is executing to all of those actions that we need to get them.
That's very helpful. Thank you and then just my follow up would be around the.
Sure.
CNS EMEA.
As progression, how comfortable you feel with that and Andy.
The demand outlook in that.
Compressor piece I realize the orders numbers, you put up including FX and so stripping that out it's a little bit.
Healthier, but are you seeing any change in demand on that piece and then PST, how long does that kind of COVID-19 headwind loss.
Yes.
From an Ips EMEA.
No change in that dynamic as.
As we see even here with our leading indicators as you very well pointed out I mean, the Q2 pretty well affected by by the FX and that's why when you can even see it Q1 to Q2 sequentially I mean, FX Euro alone was like a 5% to 6% headwind impacts. So so yes, I mean, FX, but even without the team continues.
Due to outperform.
Well and confidence on the execution with what the team continues to outlay and.
Come in coming quarters from a TSA perspective in terms of call. It <unk>.
See one more kind of a meaningful comp here in the third quarter.
That should be relatively about the same to what we saw in the second quarter and then basically after that we should be kind of clearing the goal I mean in the fourth quarter.
Thanks very much.
Thank you Julien.
Okay.
Our next question comes from Nigel Coe your lines.
Thanks, Good morning, everyone.
Okay.
A final point on that.
Facing thanks.
Is that.
Dumb math with give me two three.
$375 million of EBITDA is that does that and then my tone of where you see things.
Sure.
Yes, Nigel I think that maybe made a little on the higher side.
If you were to use kind of a mid I'm going to say mid to mid plus.
20% phasing in in Q3, I think you'd be in the right in the right zone. So maybe just maybe a little on the high side, but youre not dramatically that far off.
Okay. So like $3 50 360, Okay. That's really helpful. Thanks, and then on the PSP side.
We've talked about the margins.
You called out.
The COVID-19 headwinds and I'm wondering when do we start to lap that impact I think is four points to orders.
How does that flow through to revenues and margins. So we've seen a headwind there as well.
Yeah, Hey, Nigel so so we will see one more quarter here in the third quarter of the same kind of covert cover head related onetime from last year and.
So what you see in the third quarter should be fairly similar to what we saw here in the second quarter.
From an orders and a revenue perspective.
Alright, Okay I'll leave it there guys. Thanks a lot.
Thank you.
Our next question comes from Joe Ritchie.
Your line is open.
Thanks, Good morning, guys.
Good morning, Joe.
A couple of quick ones for me.
Trying to understand I think with a lot of a lot of our companies like how this the fact that like base metal pricing is starting to deflate and how that ultimately impacts.
The P&L out in 2023, so I'd love to hear some thoughts around.
How much of the pricing what do you think youre going to be able to hold onto versus potentially get back and what happened do you think your margins. If you do see some deflation from a from a cost input perspective.
Yes, Joe I will say that.
The way the way we think about it is that we're not we have not historically given out any pricing back.
And there isn't being <unk> all the price increases that we have gone even this year and last year have been list price increases and a way to think about it too as well our customers. They don't buy the same type of product every month I mean, they buy a compressor now and they just probably by another one 5% to eight years later, so it's kind of difficult to compare to that.
Price to price perspective include any of the market. They do but that's why we want to continue to create that are highly innovative solutions and differentiated technology that will allow us to command that premium price and.
So as we think.
Look forward, yes, I mean, we're pretty excited too that you're starting to see some of these kind of based commodities kind of dramatically reduced.
What we have here in our poor sales for our sales and we tell the teams here for the second half.
I assume inflation stays constant and kind of work on what you can control, which is price and execution and productivity and as we go into 2023, and we got a better visibility of what that deflation could happen. Yes, I mean, we see that that could be a great margin expansion for us on that on an ongoing basis.
That's great to hear to some day and maybe just I know, we've talked a little bit about the <unk> margins.
The work that you guys did on slide 12.
Year over year walk if you take a look at those four buckets M&A growth, China and in other.
When you think about <unk>.
Like maybe just talk me through like the buckets and how those buckets change in the third quarter I'm assuming that.
<unk> margins are maybe down modestly and <unk> on a year over year basis.
Yes, Joe I'll take that one so if we kind of think about the three buckets the way if I describe it is.
First starting with the biggest one the impact of M&A first and foremost we do start to lap.
The M&A obviously the biggest drivers in there we're coming from Q3 of last year's acquisitions, particularly <unk> being the biggest one and we've highlighted that one a few times. So obviously as we lap that.
And clearly with some of the.
The higher synergy expectation that we expect to see.
That was <unk>.
That will start falling off so again, we would expect to see the impact of M&A start to dramatically reduce here.
In.
In Q3 given that.
We only had one month impact last year.
Sorry, what about the impact this year in terms of timing of when we purchased it.
The impact of the China, Lockdowns, we really wouldnt expect to see that repeat at all obviously that was a very nuanced in Q2. The good news here is.
Exiting really through June exiting June our China facilities.
Particularly in PSC, we're operating right back on track and we don't have any expectations of any concerns here in Q3.
In terms of the investments for growth, yes that definitely will still be part of the equation.
I think it'll be you should expect to be dramatically different in terms of Q3, a lot of these are areas like for example, our hydrogen business and the ion solutions business.
That was highlighted in the deck and those will continue these are great innovation things that we're really excited about one that we continue to invest in and execute on.
Frankly since since last year, even through this year. So again I think that's how the three major buckets play themselves out and then as the suntan indicated here the price cost spread will continue to get better for PSC not just in Q3, but also in Q4.
Super helpful. Thanks, guys.
Thank you Joe.
As a reminder, if you do have a question. Please press star one on your telephone keypad now.
And our next question comes from Rob Wertheimer.
Your line is open.
Sure.
Hi, Thanks, and good morning, everybody.
Good morning, Rob.
My question is actually going to be on the innovation and the cole parmer plasma is something.
It sounds very interesting and will help differentiate us.
And.
Really just wanted to see if you could review your innovation sort of process changes that have gone on.
Any metrics you want to share on pacing change and so forth.
Then breakthrough innovations maybe slightly different unload.
Oil free is a known industry thing I'm not sure. If this is evidence of a different program, that's been ongoing or whether it's kind of a lucky lucky opportunity.
Or if it's a more <unk>.
<unk> spread.
Thank you.
Yes, Rob.
So very intriguing questions I'll say that the that the innovation on the cold plasma technology. It is it is highly differentiated and pretty unique.
And actually if you go out there in the market and we will be able to talk more about it.
As the only one that has all in its own and it's self contained units.
Not only the ability to create this infection, but create the ability of accelerated oxygenation and the water, which is kind of a particularly very very important for hydro culture markets on hydroponics markets and things of that so I think it's going to be really really strong we have built a very strong IP around it and.
So we have a very big barrier in terms of IP protection around that and again it speaks volumes to some of the things that we've been wanting to do which is kind of a combination of several ingersoll Rand technologies, such as compressors and pumps into additive technology that can actually create a very unique solution and again, here's just one great example.
In terms of how we think about innovation and kind of the cadence of innovation. We spoke I think it was back at the Investor Conference how from an Ics perspective, and we kind of gave a bit of a highlight that innovation accelerated dramatically.
When the combination of the companies and we continue to do a lot of that work around global summits that we have with the teams and so I think it's a very exciting piece, which is fairly recently here couple of weeks ago. We had our strategic plan review with the teams and one of the core characteristics of.
Of the review in every business there was around intellectual property and IP and patent Pic technology, because we believe that we have unique technology that can be application driven and protect that.
Perfect.
In regards to that breakthrough technology, and particularly to the centrifugal I think is just one example, where we're again you take kind of a core technology such as centrifugal compression that at a very unique for all three products and in this case ultra compression and again, we've created some IP protection around the aerodynamics of the.
The product insight in how the airflow multi site. So again, we feel that that allows us to create differentiation and energy efficiency. So.
Pretty unique model that we leverage IRS all in its own too.
Drive the process.
I will say that these iron solution to cold plasma was one great example, acquire some might be develop the IP utilized <unk> processes as a way to out execute.
The product and in less than 15 months, we went from concept to launch of a product which is pretty impressive.
Great. Thank you.
Thank you.
We have a question from Stephen Volkmann Your line is open.
Hi, Good morning, guys I, just wanted to ask about kind of what youre seeing in terms of the supply chain.
Sort of the productivity impact of that and I'm, just trying to figure out if.
There has been any kind of margin headwind to two.
All of these issues that we're seeing.
Yes, I would say.
Absolutely margin headwind because if you think about it we don't have all the components at the right time at the right place so yes that creates.
The factories to Hulu heroics.
In terms of Reconfiguring and try to maybe pre build a piece of the <unk>.
Compressor or put it on the side and then wait for the parts. So yes absolutely.
We seen productivity hits due to the inefficiencies on the supply chain.
And I think one thing we will say is that we still see supply chain <unk>.
Constraints and issues. So I don't think that everything is perfect. I mean, I think we are.
What our teams are doing with the utilization of the IRS and the processes is incredible from the perspective that they are able to outperform and you saw that very clearly with the team and Ics in China that basically outperformed dramatically.
Two driven some of the expectations that we had when they came back with a lockdown but.
Yeah definitely some headwinds to your point is a very good point that as we go into maybe 'twenty three and beyond we should see maybe the better efficiencies or productivity due to the ease of the supply chain to be more stable.
Right.
Obviously, thats exactly where I was going with this because it feels like for 'twenty three.
Demand will be whatever it is but you should see some margin tailwind from sort of normalization of supply chain at some point, presumably and then maybe price cost also turns positive and so maybe it feels like incrementals could be pretty robust in 'twenty three.
Absolutely, yes, I would agree.
The only thing to add to what you said there is we're pretty encouraged that price cost actually has been we've actually been positive.
The entire time from last year, even through the first half of this year, we do expect it obviously get better into the second half of this year and then potentially as defense I indicated earlier.
<unk> start to deflate in the next year and given how we've deployed price.
We definitely see that as a potential tailwind into 2023 I think the other the other thing we should probably mentioned here is and you said you saw it in the financials that clearly as a result of the supply chain, obviously inventory continues to.
Be at elevated levels, and I think our supply chain alleviates here, we obviously have a meaningful opportunity from a cash perspective in terms of.
Deploying that that inventory, so and again the good news is the backlog is there to do it for the back half of this year. So again, it's just a matter of us continuing to execute and seen a little bit more normalization in the supply chain.
Super Thank you.
Thank you.
Our next question comes from Nicole <unk>. Your line is open.
Thanks, Good morning, guys.
Good morning, Michael.
Just maybe going back to the comment you made about July or day Sunday.
Like you mentioned some acceleration in certain regions and markets can you elaborate a little bit on where you guys saw things improve.
Yes.
I figure that we will get the follow up for sure Yeah, I think Nicole I think we are.
It was to be honest it was fairly broad based.
What to categorize it.
Say that we saw.
We're starting to see more.
I guess release, so to speak for the some long cycle projects. So we're seeing that somewhat.
Some of these kind of large partners that have been in the pipeline.
And there's been a lot of conversations theyre getting getting released so we're seeing some good momentum on that.
As some of these are <unk>.
Energy transition related and or expansion of capacities and also in some cases onshore into as well. So we're seeing some good momentum on that perspective.
But to be honest. It was it was fairly fairly global from a from a global perspective across all regions and <unk>.
Exciting moment in the U S China, but even also in Europe . So I think it was a fairly brokerage here on the call.
And Nick maybe just a follow up on the comment you just made about free cash flow can you talk a little bit about the path you see in the second.
That can have to get to a 100% plus conversion like Barry <unk> weighted based on your plans for me do you think inventory.
Nicole I would say, it's probably second half weighted as probably the best way to say it. If you look last year is probably a good example, typically.
Typically we are seasonally more second half weighted I would say, that's probably a combination of two things one following the profitability of the company as well as the typical movements in working capital.
I think in terms of this year sure you are going to see probably a stronger fourth quarter comparatively speaking.
Yes, a lot of that is also predicated on the working capital let's call. It continued right sizing.
Inventory, obviously being the biggest piece you kind of see that through the first half that we have built a meaningful amount of inventory about $200 million I'd say to the first half headwind from a cash flow perspective, but despite that we're actually quite pleased with generated $165 million of free cash flow still in the second quarter. So again pretty pleased with the execution of the team despite what I would call.
Working capital headwind, but the good news here is we have the backlog and the path to be able to execute and free up that cash.
Thanks, Dave I'll pass it on.
Thank you Michael.
Our next question comes from led by a sticky your line is open.
Good morning, guys. Thanks for taking my question.
Morning, guys.
So so maybe just on the capital allocation front.
Good color around obviously, the three deals you've announced and then the additional allies on the bolt ons, but can you talk about.
Just given our leverage has come down.
How youre thinking about your appetite for larger deals.
Especially given maybe some some increased noise in the macro backdrop.
Sure.
Yes, I'll say Latino.
When you look at our phone off in <unk> that we have are still fairly tuck in bolt on in nature. So I'll definitely speak in terms of what we see today and the funnel is nothing around those billion plus acquisitions and no because there might not be out there, but because we're being very focused more on this kind of more bolt on in.
Nature in nature of deals at that can be highly accretive to us.
Okay.
That's really helpful. Thanks, and then.
Maybe just.
Going back to the organic growth outlook here so.
You took your organic growth outlook up on stronger at CNS growth. So can you just talk about.
What's really changed in that environment since <unk>.
Investors are more focused on potential slowdown and worried about the macro.
But youre seeing organic growth.
Accelerate so can you just talk about the drivers and how you're thinking about the sustainability of that growth trajectory beyond the back half here.
Sure.
I'll say that maybe.
To keep it more or less kind of simplistic in nature is that.
We're seeing definitely better price acceleration in reallocation.
So how sequentially Q1 to Q2.
Improved price.
The 200 basis points in terms of price, whether Ips or PSP. So again we.
And those are actions that we have taken that is already built already in the backlog. So basically shipping the product and realizing that to a higher price resignation that gives you that that increase in organic as well as also as Vic said that price cost margin amplitude that we'll continue to get better in the second half.
And to the volume.
Organic volume is then in terms of the.
Which is again supply chain constraints getting relief and be able to accelerate some of the shipments from from being able to deliver to what customers want so again as better price realization and better supply chain kind of coming to a better multi year for us that allows the factories to produce our products.
Great.
That's helpful. The same today.
This momentum.
Okay. Thank you. Thank you.
We have a question from Nathan Jones your.
Your line is open.
Good morning, everyone.
Good morning Nathan.
Wanted to start off with a question about the long cycle projects that <unk> talked about.
Some of those getting getting released and helping to drive the order book I think by the time those projects get to ordering products from from Ingersoll Rand a lot. Maybe go ahead, regardless of the macro backdrop can.
Can you talk about any information or insight you might have on some of those larger longer cycle projects that might be might be in the planning stages that maybe customers are reconsidering with higher interest rates macro uncertainty or anything like that have you heard anything about customers reconsidering or delaying kind of moving forward with earlier stage.
Projects like that.
I will say this.
Yeah.
To be honest.
So it's an interesting question, but I will say that.
Nothing that we see dramatically customers just put in a big pause.
And rethinking I think on the country I will say that because of current energy prices being so high and the fact that our technology has allowed us to drive these energy efficiency and improvements, we're seeing customers, making the acceleration of let's just get it done here now because they see energy prices to be high for the longer or kind of a <unk>.
Liam to longer period of time perspective so.
Think that again, it's caused benefit equation that we have with our products and solutions and how our teams are positioning that from a total cost of ownership to the customer that equates to.
A better carbon footprint for our customers. It is actually seeing some good momentum on getting projects, even more through the accelerated pipeline there might be.
Thanks.
For for Big on the capital structure swaps caps can you talk about.
The data you can give us on notional value or how it impacts.
The interest expense here in the short.
And what the plans.
Maybe.
Putting actual fixed debt in place over the next couple of years.
Just any details you can give us on your intentions with the capital structure.
Yeah sure. So let me maybe just for completeness here I'll kind of summarize kind of what we did here but.
We did a number of things here in the second quarter or two I'd say execute on our capital structure strategy and it's important to note that ensuring that we are on our continued path to an investment grade credit rating.
And we obviously want to make sure that we're cognizant of balancing.
Further interest rate exposure by balancing our fixed to floating ratio as you indicated and so what we did was I would say three distinct things are three to four distinct things in the quarter. One we did pay off the full amount of the euro denominated term loan which was in dollar terms $621 million.
Then we executed 1 billion euros.
USD to Euro cross currency swaps.
Three year term and 50% of that swap to fixed 50% floating.
And then the final piece is we executed a $1 billion U S. Dollar interest rate tax capped at 4% on the on the base interest rates.
So again, we've meaningfully changed our fixed to floating ratio here in the context.
Where we were exiting Q1 for example to where we are now exiting Q2 and I think in the context of your kind of second part of your question. Yes. I mean I think this is just a step into consistent evolution of our capital structure as indicated here. We do continue to see a path to investment grade credit rating at which point in time, clearly we would expect.
The nature of our capital structure to continue to evolve and change at which point, we'll probably go into more of a fixed rate structure at that point in time. The good news here is the maturity of our debt towers right now Rollouts 2007. So it gives us some time here to continue to both evaluate but execute and change that.
Structure and.
I think the good news here is we still have a considerable amount of flexibility as well as coupled with the strong free cash flow as well as with the I would say the amount of cash and liquidity. We have exited Q2. It gives us I would say a lot of flexibility to continue to execute on our capital allocation strategy, which you heard from essentially obviously, we will continue to be very M&A centric and clearly the funnel continues to support that.
And maybe just the bottom line, what's the quarterly run rate for interest expense.
Yes, youll probably be.
Say closer to the high 22.
In India in the back half of the year on average.
Roughly speaking.
From an interest in that.
Thanks very much.
Thanks Steven.
As a reminder, for those who joined the call late if you do have a question. Please press star one on your telephone keypad now.
And we have a question from Joe O'dea.
Your line is open.
Hi, good morning.
Thank you I wanted to ask on the M&A contribution to growth based on the deals this quarter and then based on what you have under LOI. When you think about the framework of the 4% to 5% annual target.
And given kind of whats in motion right now what kind of contribution you think that's setting up for next year are we looking at something better than that based on the number of deals that we're looking at here.
Yes, Joe I think I think the best way to think about this as maybe two pieces.
What our commitment and what we still are reaffirming here today is the ability to execute four to 500 basis points on an annualized basis of inorganic growth. So let me take into two pieces.
You can see in the guidance, we still are committed to about $225 million of in year impact now. The reality is that's largely coming from the deals that you saw already announced primarily in the second half of last year as well as Youll see remember we did we did one small bolt on in the first quarter of a business called York. So that's really what's driving the $225 million.
Three deals that were announced earlier this week they are actually not in guidance yet because they have not been closed we expect them all to all to close in the second half of the year.
And <unk>.
Based on what the S&P indicated the LOI and what's in the funnel.
Again, the annualized impact of those.
Those deals as well as the ones. We just announced again, we would expect to get to four to 500 basis points on an annualized basis. So.
We actually see that whether you want to look at the in year impact of revenue the annualized impact of what we expect to be able to purchase this year all of US all of those lead to the 4% to 500 basis points whichever way you want to look at it which.
Which is actually setting us up nicely here, if I'd say the M&A impact to revenue as we go into 2023.
I think Joe depending on when we look at it actually probably leads to the same answer but just want to make sure. We understand that the three deals announced here earlier. This week. They are technically not in guidance, yet and they won't be until we actually close the deals.
Understood.
And then circling back on the.
Asia Pac orders and up low double digits, China mid twenties.
The rest of Asia.
Can you talk a little bit about the degree to which you have insight into outperformance in the market some of what's driving the growth that youre seeing in the region there.
Yes, Joe.
According to the teams and there's actually not.
Not a third party report.
In Asia Pacific were in China, but you can do a lot of triangulation on yes, I mean, according to our gains we continue to outperform what we see in terms of our peers from a compressor perspective.
And I think also the teams continue to leverage really well the technology that we have around vacuums and blowers and really expanding that penetration in the market, where our market share is today fairly small.
So we have a very big great opportunity to accelerate that and and the last piece I'll say joined our team in India.
The Asia Pacific the ATI team has been incredibly agile.
In terms of being able to take the technology that we have in our kind of pilot of old technology compressor as well as the backend and really more pretty quickly to create applications to those areas, where they're seeing kind of the good areas of growth momentum. So I think this is something that.
I'll say it really is kind of not that well understood externally, but the fact that we have we've kind of great technologies that you can make them applicable to the end markets and to the growth trends that you have it is something that is unique to what we have in our portfolio and that has been pretty well executed by our.
Our team in Asia Pacific and other regions, but particularly China team has done a phenomenal job just executing to that strategic aspect.
Got it thanks very much.
Thank you Joe.
And we have no further questions in queue at this time I will turn the call back over to Mr. Riendeau.
Thank you Paul I'd like to say a few things here at the end I just want to say that I'm very proud and we're all very proud of the work our teams have done over the second quarter and the first half of 2022, I mean in terms of performance and navigating this challenging macro environment you can see that Ingersoll Rand continues to be very financially strong operationally fit.
And our business is quite resilient.
And more important on our culture of agility and ownership, while leveraging <unk> is essential to our continued momentum and we importantly, I want to highlight that we continue to build a stronger team for long lasting performance and with that we're super excited about the announcements of Mark Stevenson, our microfilm appeal to the board, adding them to the board I know bode well.
Incredible value as we continue to transform our company so with that I just want to say. Thank you for your continued support and look forward to speaking with many of you here. So thank you.
This concludes today's conference call. Thank you for attending.